Posted on 08/16/2008 2:18:24 PM PDT by dennisw
Crude Oil Forecast
Will "Private" Oil Sink the NYMEX?
Oil-Rich And Oil-Hungry Governments Are Ditching Conventional Markets And Locking Up Reserves… Here's How They Could Permanently Destabilize the Price of Crude
An Investment U White Paper Report
by Stewart Miller and the Investment U Research Team
The world's largest governments are drastically changing the way they buy and sell oil. And it could affect every family, small business and multibillion-dollar corporation across the globe…
So far, this historic shift has been scarcely reported. But the transformation is undoubtedly underway, and quietly altering the future of energy.
Rapid economic expansion in Russia, India and, most importantly, China, has led the governments in these countries to review their traditional sources of oil, and to make substantial changes in the way they get it.
And they've opted to circumvent the traditional distribution networks of the New York Mercantile Exchange (NYMEX), and other bourses, entirely.
In fact, they're undermining them, "locking up" supplies by purchasing crude from oil-producing countries directly - behind closed doors:
This strategy is coming to be known as "Energy Mercantilism." Producers - and consumers - are bypassing the marketplace altogether. And it's taking massive quantities of oil off the open market.
Now, the crude oil market's forecast is wide open. The free markets that have historically determined the pricing and allocation of oil are in sudden danger of extinction. And with them, competitive prices for U.S. consumers…
State-Run Oil Will Dominate the World Energy Market
In the past, the world has relied on an open marketplace to set the price of energy. For decades, the NYMEX has been the epicenter of energy trade.
But China and India, in cooperation with a key supplier, Russia, have turned the tables by making bi-lateral agreements to lock in long-term supplies at set prices, or by forming consortiums to guarantee supply.
China has become the world's second-largest importer of oil. And the U.S. Energy Department estimates that the country's demand will more than double, to 14.2 million barrels a day, by 2025. More than two-thirds of that will be imported.
Currently, China builds cities the size of New York twice a year.
Every time a new barrel of oil is discovered, the world uses four existing barrels. But China and India's demand for oil is still in its infancy - around 1.3 barrels per person per year, compared to 4.4 barrels per person per year in the developed world.
When their economies begin using 2.4 barrels per annum per person, they'll need 24 billion barrels of oil a year - double the current amount consumed worldwide.
What's important to emphasize is that in this new Energy Mercantilism, oil prices are locked-in, no matter how the market fluctuates in the future. That means not everyone will pay the same price for oil, fundamentally altering the dynamics of the energy marketplace. It directly counters market pricing, and destabilizes the supply/distribution channels that currently determine who can afford oil.
And These "Private" Oil Deals Are Beginning To Roll in…
- In Russia, Vladimir Putin has been squeezing Europe by withholding supplies of natural gas while negotiating for exclusive pipeline deals. In 2003, he dismantled the Yukos oil group who had expanded dealings with the West. He has explicitly stated that Russia will demand bilateral long-term supply contracts with consuming nations, so Russia could guarantee stable demand for its exports.
- China National Petroleum Corp. has entered joint development agreements with Sudan, which is forecasted to produce as much as 300,000 barrels per day by the end of 2006. Another Chinese firm, Sinopec Corp., is erecting a pipeline from that complex to Port Sudan on the Red Sea, where the Chinese are building a tanker terminal for shipping raw crude to the Chinese mainland. Altogether, Sudan, despite conducting what is widely regarded as genocidal warfare not far from the oilfields, provides 10% of Chinese petroleum imports.
- In November 2005, Chinese President Hu Jintao toured Latin America and completed a number of economic deals, including an oil deal with Argentina. Hugo Chavez, the President of Venezuela, has said Chinese firms would be allowed to operate 15 mature oil fields in eastern Venezuela, which could produce more than one billion barrels. Chavez has also invited Chinese firms to bid for natural gas exploration contracts.
- Sinopec, China's state-owned oil giant, signed a $70 billion deal with the Iranians in November 2004 to develop the Yadavaran oil field. Sinopec will also buy 250 million tons of liquefied natural gas over 30 years. Iran is committed to export 150,000 barrels per day of crude oil to China for 25 years.
- Recent testimony before the Congressional Committee on National Security, Emerging Threats and International Relations, outlined how China's three state-owned oil companies "have managed to establish control over about 3 mb/d [million barrels a day] of crude production, which could reach up to 6 mb/d by 2008."
The fact is, 90% of world reserves are controlled by national oil companies, as opposed to market-driven public companies.
Exxon Mobil (NYSE: XOM), for example, is the largest publicly traded oil company. And it ranks only 14th in proven reserves, directly below 13 national oil companies, including those of Iran, Venezuela, and other governments overtly unfriendly to the U.S.
Forecasting Crude Oil… The Bottom Line
A task force for the Council on Foreign Relations (CFR), a highly respected Washington think tank, recently released a report that contains dire predictions for our economy and global oil markets.
Led by ex-CIA chiefs John Schlesinger and John Deutsch, the group reports that the United States will be unable to achieve energy independence any time in the foreseeable future, even with massive injections of ethanol, wind power and other alternative fuels.
Noting the potential ramifications of Energy Mercantilism, it recommends radical conservation initiatives, possibly including higher gasoline taxes and gasoline rationing.
It also calls for the implementation of "an active public policy… to correct these market failures that harm U.S. economic and national security."
"Most oil and gas resources," the report states, "are controlled by state-run companies, some of which enter into supply contracts with consumer countries that are accompanied by political arrangements that distort the proper functioning of the market."
Conclusion on Crude Oil and the NYMEX
The fact is, more and more oil buyers and sellers are hooking up directly, outside of the marketplace. And in many cases, they're including other "payments" into the transactions - direct investment, infrastructure development, political favors, trade agreements, etc.
And therein lies the uncertainty. How does one know if he's paying the going rate for oil when a going rate doesn't exist?
Don Miller, Investment U Researcher
Some good reasons why all new oil from US Government lands such as Alaska and new offshore drilling should be by law reserved for US refineries and use within the United States. None is sold abroad
I had never heard of this; it's going to take a while to wrap our minds around what this means, exactly.
Right now, I'm wondering about this:
What's important to emphasize is that in this new Energy Mercantilism, oil prices are locked-in, no matter how the market fluctuates in the future.
These prices are "locked-in" by contracts. But what is the enforcement mechanism should a party renege?
Pricing ((((PING))))!
This makes the Rats' vapid vendetta against "Big Oil" even more dangerous.
They are weakening and undermining the only segment of the oil market that has any flexibility at all to respond to U.S. consumer demands.
There is no reason not to take this approach.
Indeed, it wouldn't be the first time...
As background, understand that one of the conditions for allowing the Trans-Alaska Pipeline to be built was that oil from the North Slope would NOT enter the world market, but would be refined and consumed domestically. The enabling legislation, if I recall correctly, was dated 1976 -- and it had a twenty-year term.
Thus, until 1996, all North Slope oil was refined and consumed in the U.S.
When the legislation expired in 1996, there was a relative glut of crude on the West Coast. Accordingly, President Clinton signed an executive order that allowed North Slope oil to be shipped outside the U.S. From 1996 until 1999, about 3% of total North Slope production was shipped to the Pacific Rim (chiefly Japan and Thailand).
At that point, the glut disappeared (inasmuch as production on the North Slope was starting to decline) and exports ceased.
Today, all North Slope production is again shipped to the West Coast for refining and consumption.
Thus, across its history, almost no North Slope oil has entered the world market (which is not to say it does not bear a world oil market price).
Anything that you have heard to the contrary is misinformation -- either out of ignorance or willful intent to mislead.
Every country that is "locked up" for its oil exports will get to watch its neighbors take in big money as they sell oil at the market price; "locked up" countries will waste away selling oil at a fraction of the world price.
The article fails to mention the most important aspect of mercantilism; that throughout its history it has always needed to be backed up by military force. If we're moving into a mercantilist world, there is no asset I'd rather have than the US Navy, which can blockade any port in the world at any time for as long as it wants.
Many factors such as military force or cut off of energy supplies. Many factors....
I've noticed for years China locking up oil with Iran. Iran gets military hardware, consumer goods and consumer electronics
China might also back up Iran in a confrontation with Israel or the USA
If oil/energy prices sink you will see less "locking up"
Thus, until 1996, all North Slope oil was refined and consumed in the U.S.
When the legislation expired in 1996, there was a relative glut of crude on the West Coast. Accordingly, President Clinton signed an executive order that allowed North Slope oil to be shipped outside the U.S. From 1996 until 1999, about 3% of total North Slope production was shipped to the Pacific Rim (chiefly Japan and Thailand).
At that point, the glut disappeared (inasmuch as production on the North Slope was starting to decline) and exports ceased.
Today, all North Slope production is again shipped to the West Coast for refining and consumption.
All correct
The laws allowing North Slope oil mandated it all be kept in the USA.
This law was slightly modified during an oil glut
I'm amused to hear Rush Limbaugh and one of his substitute hosts declare this new Alaskan/offshore oil should be thrown onto the world market and that will lower prices for us here. So ridiculous and demonstrative of the outer limits approach of free market ideologies
I have two minds on this situation. On one hand, bilateral agreements are just bypassing the middleman. If the middleman is not providing value, it is better to bypass the additional costs.
My concern is that oil is controlled by cartels with lots of political influence on the cartels. These state run energy companies are notoriously inefficient. In addition, the bilateral agreements may have non economic clauses such as defense agreements. The bilateral agreements are also secrets so markets cannot reflect full information about oil trading.
This situation makes it imperative that we develop our own sources of energy both conventional and non conventional. A good argument can be made that energy development is an issue of national survival. Drill here, drill now, pay less, and escape the economic blackmail of our enemies.
Death of your fungible oil. Putin also dealt a blow to free and fungible oil when he invaded Georgia. Oil ain’t fungible without a pipeline!
Russia, India and China are involved in efforts to build and control petroleum pipelines throughout the central-Asian and Middle Eastern regions. The Shanghai Cooperation Council, for instance, was formed to ensure that oil from the giant Baku-Tbilisi-Ceyhan pipeline flows to the East, not West.
Sinopec, China's state-owned oil giant, signed a $70 billion deal with the Iranians in November 2004 to develop the Yadavaran oil field. Sinopec will also buy 250 million tons of liquefied natural gas over 30 years. Iran is committed to export 150,000 barrels per day of crude oil to China for 25 years.
It seems to me this development has to be viewed through a prism that is more comprehensive than economics.
These type of contracts, for a resource vital to a nation's self interests, if not survival, would provide a basis for military "enforcement" actions. (Or at least the pretext therefore.)
The fact that it may or may not be a good deal economically pales beside the fact that it locks countries together in relationships that then can reasonably be expected to turn violent if disputes arise.
So you prefer the idea of the USA with an outstretched begging bowl? Begging for oil/gas in a market that shrinks as long term deals are struck
These state run energy companies are notoriously inefficient.
Say what you will but they do 90% of the earths oil business. The Exxon, Shells, Total of France, do 10%
Matter of fact Russian oil companies are very efficient at robbing and stealing from partners on mega projects such as Sakhalin Island where Shell was robbed of billions and billions when Russia reduced its participation from 50% to 24%. And Shell is not alone
Brazil's state run oil company is very efficiently jumping on and exploiting its new found offshore oil wealth
Pemex --- a total disaster
Venezuala --- probably depleting its fields in a very destructive and short term way
Norway -- Well run state oil company which I believe has private investors/stockholders too. Very innovative in offshore drilling
Gazprom --Private but an arm of the Russian state --Well run as far as I know
Well, even if we shipped the oil abroad, it would lower prices for us here.
But it's a helluva lot more efficient to ship the crude oil to the nearest refineries and markets. That's the "free market solution".
Fact is, there's no point in shipping the oil elsewhere -- unless the Congress decides to indulge in price-fixing along with windfall profits taxation.
Then, it would stay in the ground...
....recommends radical conservation initiatives, possibly including higher gasoline taxes and gasoline rationing.
No thanks. There has to be a Plan B. Pretty much any Plan B is a better alternative.
Exactly. This is not free market libertarian economics. This is high stakes geo-political economics. As high stakes as it gets. Wars are fought over this. Wars like Russia invading Georgia
These type of contracts, for a resource vital to a nation's self interests, if not survival, would provide a basis for military "enforcement" actions. (Or at least the pretext therefore.)
We could "do a Putin" on Venezuela. Or at least get Hugo Chavez assassinated. In the good old days this was the job of the CIA. To take care of a Hugo Chavez before he got to be a problem
The main effect it looks like they could have in the future is to provide a basis or a pretext for military action, either to "enforce" the supply of oil or to come to the "aid" of a supplier country.
For example, China might claim it has an interest in protecting the Iranian oil fields in any U.S.-led operation against Iran (or any Russian aggression in Iran) because it has, in fact, pre-bought the oil from those fields.
In geopolitical terms, this ability to proffer a concrete "interest" in another country's stability, etc., would be much more "valuable" than simply locking in the price of oil and stabilizing oil supplies.
Well, even if we shipped the oil abroad, it would lower prices for us here.
Not as much as keeping it here especially in a less fungible world for oil. Please tell me you don't go along with Limbaugh on this
I confess to not knowing much about the global oil markets. You bring up some excellent points. In fact, I think you have stated the best reasons yet for developing domestic oil.
John Schlesinger and John Deutsch. Both losers and idiots.
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